CDs vs. Bonds: Which Is a Better Investment? (2024)

What Is the Difference Between CDs and Bonds?

Certificates of deposit (CDs) and bonds are both considered safe-haven investments. Both offer only modest returns but carry little or no risk of principal loss. They are much like interest-paying loans, with the investor acting as the lender. Many investors choose these options as a slightly better-paying alternative to a traditional savings account. However, they have fundamental differences that may make one a better investment than the other for some investors.

Key Takeaways

  • Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk.
  • When interest rates are high, a CD may yield a better return than a bond.
  • When interest rates are low, a bond may be the higher-paying investment.

Understanding CDs and Bonds

CDs

CDs are available from banks or credit unions and function much like savings accounts, but they offer a slightly higher rate of interest. In return, the holder agrees to let the issuing financial institution keep and use their money for a set period. That period can be as short as six months or as long as 10 years. Extended holding periods offer higher interest rates.

CDs are as safe as an investment gets. The Federal Deposit Insurance Corporation (FDIC) guarantees them up to $250,000, so even if the bank should fail, an investor recoups the principal up to that limit.

One risk an investor faces with a CD is inflation. If an investor deposits $1,000 in a CD for 10 years, and inflation rises over those 10 years, the buying power of that $1,000 isn’t what it was at the time of the deposit. CD interest rates rise with the rate of inflation because the bank must offer a better return to make its CDs competitive. Therefore, buying a long-term CD might be a great deal in times of higher interest rates. However, locking in money when interest rates are low will look like a bad deal if the interest rates rise.

In short, a CD is a great place to park some money you don’t need without fear that it will disappear. At worst, the money won’t grow as fast as inflation.

Bonds

Bonds, like CDs, are essentially a type of loan. The bondholder is loaning money to a government or corporation that issues the bond for a set period in return for a specific amount of interest.

Bonds are issued by governments and companies to raise money. Highly rated bonds are as safe from losses as the entities that back them. Unless the government collapses or the company goes bankrupt, the principal is safe and the agreed-upon interest will be paid. Also, if a company goes bankrupt, bondholders are repaid before stock owners.

Bonds are rated by several agencies, the best known of which are Moody’s and Standard & Poor’s. The bond rating is the agency’s evaluation of the creditworthiness of the issuer. Many investors won’t go below the top rating of AAA. Lower-rated bonds pay a little more interest, but that comes with additional risk.

A crucial difference between CDs and bonds lies in how they react to increased interest rates. When interest rates rise, bond prices decrease. That means that a bond will lose market value if interest rates rise. That is, if you sold the bond on the secondary market, it would go for less because other bonds would be available that pay a higher rate of return.

No matter what happens in the secondary market, if you buy a bond, the agreed interest will be paid and it will be worth its full value when it reaches maturity.

Special Considerations: Safety and Liquidity

CDs are the ultimate safe-haven investments because the money is insured up to $250,000. U.S. government bonds are also considered very safe. High-quality, highly rated corporate bonds are effectively safe from all but catastrophe.

However, remember that both come with a commitment to a length of time. You may not want to buy a long-term CD when interest rates are low or a long-term bond when interest rates are high. Assuming that the historical trend reverses, as it always does sooner or later, you may be locking yourself into a reduced rate of return.

Both CDs and bonds are relatively liquid investments, meaning that they can be converted back into cash fairly quickly. However, cashing them in before their redemption date can be costly. In the case of CDs, the bank may impose a penalty that eliminates most or all of the promised earnings since there is no legal maximum for the fee. In the case of bonds, selling early at the wrong time risks the loss of value and the forgoing of future interest payments.

The wise investor keeps an emergency fund where money is available without penalty. That probably means a regular savings account.

What Happens When a CD Matures?

Since a CD is processed through a bank, the process after a CD matures will differ depending on the institution. Generally, you will receive either a check or a direct deposit into your bank account with the funds.

Are CDs and Bonds Safe Places To Keep My Money?

Bonds and CDs are generally low risk. CDs are backed by the FDIC for up to $250,000, even if the bank collapses. Bonds are backed by the organization that issues them, so your money is only at risk if that government or company fails.

Should I Keep My Emergency Fund in a CD or Bond?

No, it is better to keep your emergency fund in a place where it can be withdrawn immediately without penalty. While CDs and bonds do convert back into cash rather quickly, you will often be penalized for doing so prematurely.

The Bottom Line

While both CDs and bonds are very safe and potentially liquid depending on their maturity they can each be a fit for investors depending on their goals, willingness to research, and access in the marketplace. CDs are available through banks and brokerage firms while U.S. savings bonds and other treasury securities can be accessed through brokerage firms and directly through the U.S. treasury website. The returns will usually be very modest relative to other investment vehicles but both offer the ultimate in investment safety with the lowest risk among investment instruments.

CDs vs. Bonds: Which Is a Better Investment? (2024)

FAQs

CDs vs. Bonds: Which Is a Better Investment? ›

After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.

Is it better to invest in CDs or bonds? ›

Key Takeaways. Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.

Why is CD not a good financial investment? ›

CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.

What is better to invest in than a CD? ›

However, stocks are much better than CDs for long-term investors who have the time to ride out short-term losses.

Why do small investors like CDs? ›

Unlike most other investments, CDs offer fixed, safe—and generally federally insured—interest rates that can often be higher than the rates paid by many bank accounts. And CD rates are generally higher if you're willing to sock your money away for longer periods.

Are bonds safe if the market crashes? ›

Do Bonds Lose Money in a Recession? Bonds can perform well in a recession as investors tend to flock to bonds rather than stocks in times of economic downturns. This is because stocks are riskier as they are more volatile when markets are not doing well.

How much is a $100 savings bond worth after 30 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount30-Year Value (Purchased May 1990)
$50 Bond$100$207.36
$100 Bond$200$414.72
$500 Bond$400$1,036.80
$1,000 Bond$800$2,073.60

How much does a $10,000 CD make in a year? ›

Earnings on a $10,000 CD Over Different Terms
Term LengthAverage APYInterest earned on $10,000 at maturity
1 year1.81%$181
2 years1.54%$310.37
3 years1.41%$428.99
4 years1.32%$538.55
1 more row
Apr 24, 2024

What's the best investment right now? ›

11 best investments right now
  • High-yield savings accounts.
  • Certificates of deposit (CDs)
  • Bonds.
  • Money market funds.
  • Mutual funds.
  • Index Funds.
  • Exchange-traded funds.
  • Stocks.
Mar 19, 2024

Why should you put $5000 in a 6 month CD now? ›

While longer-term CDs may tie up your funds for years, a 6-month CD allows you to access your money relatively quickly. If you suddenly need your $5,000 for an emergency or a more lucrative investment opportunity arises, you won't have to wait years to access your funds without incurring hefty penalties.

Are CDs safe if the market crashes? ›

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

Why choose bonds over CDs? ›

If you're looking for safety and predictability with your investments, CDs and bonds can offer both. However, CDs may ultimately be better for those who prefer the comfort of an insured investment. Bonds could be a better choice for those needing the tax advantages that municipal bonds offer.

What is the biggest negative of putting your money in a CD? ›

Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

Is it worth putting money in a CD right now? ›

If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.

How to avoid tax on CD interest? ›

If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.

How much will a $500 CD make in 5 years? ›

This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.

Is now a good time to buy bonds? ›

Bond yields have shot higher since March 2022, when the Federal Reserve began raising interest rates. The 10-year Treasury yield has soared to 4.67% Friday (April 26) from 1.72% Feb. 27, 2022. It even hit a 16-year high of 5% last October.

Why are Treasuries better than CDs? ›

CD and Treasury bill rates offer similar rates for terms of one to six months. CDs are paying higher rates than Treasury bills and Treasury notes for terms of one to five years. Treasuries are exempt from state income taxes, which is an important advantage when rates are nearly the same.

Are CDs good to invest in right now? ›

If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed over the past two years: 1-year CD rates have increased more than seven-fold, with 3-year and 5-year CDs up nearly four-fold and three-fold, respectively.

How much will a 10000 CD earn? ›

Earnings on a $10,000 CD Over Different Terms
Term LengthAverage APYInterest earned on $10,000 at maturity
1 year1.81%$181
2 years1.54%$310.37
3 years1.41%$428.99
4 years1.32%$538.55
1 more row
Apr 24, 2024

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